IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
IN RE COTY INC. ) Consolidated
STOCKHOLDER LITIGATION ) C.A. No. 2019-0336-AGB
)
MEMORANDUM OPINION
Date Submitted: May 8, 2020
Date Decided: August 17, 2020
Ned Weinberger, LABATON SUCHAROW LLP, Wilmington, Delaware; Joel
Friedlander, Jeffrey M. Gorris, and Christopher P. Quinn, FRIEDLANDER &
GORRIS, P.A, Wilmington, Delaware; John Vielandi and David MacIsaac,
LABATON SUCHAROW LLP, New York, New York; Jeremy S. Friedman and
David F.E. Tejtel, FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New
York; D. Seamus Kaskela, KASKELA LAW LLC, Newtown Square, Pennsylvania;
Attorneys for Plaintiffs Massachusetts Laborers’ Pension Fund, Charles Waddell
and John Bicanich.
Kevin R. Shannon, J. Matthew Belger, and Nicholas D. Mozal, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Attorneys for Defendant
Pierre Laubies.
Gregory P. Williams, Raymond J. DiCamillo, Angela Lam, and Kevin M. Regan,
RICHARDS LAYTON & FINGER, P.A., Wilmington, Delaware; James W.
Ducayet, Nilofer Umar, Benjamin Friedman, and Zarine Alam, SIDLEY AUSTIN
LLP, Chicago, Illinois; Attorneys for Defendants Sabine Chalmers, Paul S.
Michaels, Erhard Schoewel, and Robert Singer.
Paul J. Lockwood, Alyssa S. O’Connell, and Bonnie W. David, SKADDEN, ARPS,
SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Lauren E. Aguiar,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New York, New York;
Attorneys for Defendants Joachim Faber, Olivier Goudet, Peter Harf, Anna-Lena
Kamenetzky, JAB Holding Company S.à.r.l., JAB Holdings B.V., JAB Cosmetics
B.V. and Cottage Holdco B.V.
Patricia L. Enerio and Aaron M. Nelson, HEYMAN ENERIO GATTUSO &
HIRZEL LLP, Wilmington, Delaware; Attorneys for Nominal Defendant Coty Inc.
BOUCHARD, Chancellor
This case concerns a transaction in which a large conglomerate (JAB)
increased its stake in Coty Inc. from approximately 40% to approximately 60%
through a partial tender offer that closed in April 2019. JAB commenced the tender
offer after overhauling Coty’s management team but before disclosing the
company’s new strategic plan. In connection with the tender offer, JAB affiliates
entered into a stockholders agreement requiring that two new independent directors
be added to Coty’s board of directors by September 2019 and that at least four
independent directors serve on the board while the agreement is in effect.
Plaintiffs are stockholders of Coty. Their consolidated complaint contains
four claims. The first two claims assert that Coty’s directors and JAB as Coty’s de
facto controlling stockholder breached their fiduciary duties for their roles in
initiating and approving the tender offer at an unfair price and through an unfair
process. The other two claims are brought derivatively on behalf of Coty. They
assert that JAB’s affiliates breached obligations in the stockholders agreement to
ensure the presence of independent directors on Coty’s board and that Coty’s
directors caused and failed to remedy ongoing breaches of the stockholders
agreement.
Each of the defendants moved to dismiss the complaint in whole or in part
under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. For the
reasons explained below, each of defendants’ grounds for dismissal fail.
1
I. BACKGROUND
Unless otherwise noted, the facts recited in this opinion are based on the
allegations of the Verified Second Amended Class Action and Derivative Complaint
(“Complaint”) and documents incorporated therein.1 Any additional facts are
subject to judicial notice.
A. The Players
On April 25, 2019, an affiliate of JAB Holding Company S.à.r.l. (“JAB
Parent” and collectively with its affiliates, “JAB”) completed a partial tender offer
to acquire 150 million shares of Coty Inc. (“Coty” or the “Company”), increasing
JAB’s beneficial ownership of Coty’s outstanding stock from approximately 40% to
approximately 60% (the “Tender Offer”).2
JAB is a German conglomerate, headquartered in Luxembourg, with an
extensive portfolio of companies and a focus on long-term investments.3 JAB’s
portfolio includes, among others, Coty, Jacobs Douwe Egberts B.V., Krispy Kreme
Doughnuts Corporation, Keurig Dr Pepper Inc., Panera Bread Company, and a
1
Verified Second Am. Class Action and Deriv. Compl. (“Compl.”) (Dkt. 55). See Winshall
v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (“[P]laintiff may not reference certain
documents outside the complaint and at the same time prevent the court from considering
those documents’ actual terms” in connection with a motion to dismiss).
2
Compl. Preamble; id. ¶¶ 2, 8, 147.
3
Id. ¶¶ 24, 32, 39-40, 85, 164.
2
minority stake in Reckitt Benckiser PLC.4 The Reimann family owns the majority
of JAB and is actively involved in the day-to-day operations of JAB’s companies.5
JAB appoints the board of directors for the Reimann family’s foundation: Benckiser
Stifung Zunkunft (the “Benckiser Foundation”).6
Nominal defendant Coty is a Delaware corporation and one of the world’s
largest beauty companies with operations in 46 countries across three
divisions: Luxury Brands, Professional Beauty, and Consumer Beauty.7 JAB
acquired Coty in 1992 and took it public in June 2013.8
The plaintiffs in this case are Massachusetts Laborers’ Pension Fund, Charles
Waddell, and John Bicanich (“Plaintiffs”). They allege they were Coty stockholders
at the time of the Tender Offer and have held shares of Coty continuously since
then.9 Each plaintiff served books and records demands on the Company concerning
the Tender Offer.10
The defendants in this case consist of three entities affiliated with JAB Parent
that hold shares in Coty and the nine members of Coty’s board of directors (the
4
Id. ¶ 24.
5
Id. ¶¶ 33-37.
6
Id. ¶ 16.
7
Id. ¶¶ 13, 42.
8
Id. ¶ 42.
9
Id. ¶ 14.
10
Id.
3
“Board”) at the time of the Tender Offer: four directors affiliated with JAB and five
other individuals (together, the “Individual Defendants”).
The three affiliates of JAB Parent that holds shares of Coty are Defendants
JAB Holdings B.V., JAB Cosmetics B.V., and Cottage Holdco B.V.11 JAB Holdings
is a private limited liability company organized under the laws of the Netherlands
and is an indirectly wholly-owned subsidiary of JAB Parent.12 JAB Cosmetics and
Cottage Holdco are also private limited liability companies organized under the laws
of the Netherlands but are wholly-owned subsidiaries of JAB Holdings.13 This
opinion refers to these three entities together as the “JAB Entities.”
Defendants Joachim Faber, Olivier Goudet, Peter Harf, and Anna-Lena
Kamenetzky have served on the Board since 2010, 2013, 1996, and January 2019,
respectively.14 Each serve in fiduciary roles at JAB entities.15 Faber is Chairman of
the Shareholder Committee of JAB Parent and serves on the board of the Benckiser
Foundation along with Harf.16 Goudet is Chief Executive Officer of JAB Parent and
serves as one of two Managing Partners of JAB Parent along with Harf, who also
11
Id. ¶¶ 25-27.
12
Id. ¶ 25.
13
Id. ¶¶ 26-27.
14
Id. ¶¶ 16-19.
15
Id. ¶ 50.
16
Id. ¶¶ 16, 18.
4
serves as Chairman of JAB Parent.17 Harf “describes himself as effectively an older
brother” to the Riemann family members that own the majority of JAB.18
Kamenetzky is a Partner and Head of Business Development of JAB Parent, Co-
Head of JAB Consumer Fund, and a director of various JAB affiliates.19 This
opinion refers to these four directors, which Coty admits lack independence from
JAB,20 as the “JAB Directors.”
The five remaining members of the Board are Pierre Laubies, Paul S.
Michaels, Sabine Chalmers, Erhard Schoewel, and Robert Singer.21 This opinion
refers to four of these individuals who did not hold a management position at Coty
(Michaels, Chalmers, Singer, and Schoewel) collectively as the “Outside Directors.”
Three of the Outside Directors (Chalmers, Singer, and Schoewel) served on a special
committee of the Board formed to evaluate the Tender Offer (the “Special
Committee”), with Schoewel as Chairman.
Laubies became Coty’s Chief Executive Officer and a Coty director in
November 2018. Before joining Coty, Laubies served as a senior executive of Mars,
17
Id. ¶¶ 17, 18.
18
Id. ¶ 37.
19
Id. ¶ 19.
20
Id. ¶ 50.
21
Id. ¶¶ 15, 21-23.
5
Incorporated, overlapping with several JAB partners, and then as CEO of one of
JAB’s affiliates, Jacobs Douwe Egberts, from September 2013 to December 2017.22
Michaels joined the Coty Board in 2015 after serving as President of Mars
from 2004 to January 2015, overlapping with Goudet’s tenure as CFO and advisor
to the board of directors, and other JAB partners’ tenures at Mars.23 In 2017 and
2018, JAB appointed Michaels to the boards of JAB affiliates Krispy Kreme
Doughnuts and Keurig Dr Pepper.24
Chalmers joined the Coty Board in 2017, after serving as a senior executive
of Anheuser-Busch InBev SA/NV (“AB InBev”) for twelve years. During
Chalmers’ tenure at AB InBev, Harf and then Goudet served as Chairman of AB
InBev’s board of directors.25 Chalmers co-chaired galas with both Harf and Goudet
in 2016 and 2017 and was appointed to the AB InBev board in 2019.26
Schoewel worked for JAB controlled entities for over 25 years until he retired
in 2006, when he joined the Coty Board.27 Schoewel also serves on the board of the
Benckiser Foundation along with Harf and Faber and has invested approximately
22
Id. ¶¶ 20, 77-78.
23
Id. ¶¶ 17, 21, 73-74.
24
Id. ¶¶ 73, 75.
25
Id. ¶¶ 15, 17, 63, 66.
26
Id. ¶¶ 68-69, 71.
27
Id. ¶¶ 22, 51-52.
6
$8.5 million in JAB Consumer Funds—an exclusive JAB affiliate.28 Schoewel’s
own family foundation is housed within the Benckiser Foundation, which provides,
among other things, office space, lectures, and consulting services, and initiates and
finances independent research projects.29
Singer joined the Coty Board in 2010 when JAB privately-owned Coty. Since
2010, Singer has served as a director of various JAB affiliates, including Panera
Bread and Keurig Dr Pepper, and on the board of directors of several entities
privately owned by JAB.30 Singer is also a paid consultant for JAB and received
$175,000 and $200,000 in consulting fees from JAB in 2017 and 2018,
respectively.31
B. The P&G Transaction and Coty’s Leadership Change
In October 2016, Coty merged with Proctor & Gamble’s specialty beauty
business, which more than doubled Coty’s size.32 After the transaction, JAB lost its
voting control over Coty and owned approximately 36% of Coty’s fully-diluted
28
Id. ¶¶ 53-54.
29
Id. ¶¶ 55-56.
30
Id. ¶ 59.
31
Id. ¶¶ 23, 59-60.
32
Id. ¶¶ 46, 80.
7
common shares.33 Due to the transaction’s structure, JAB was restricted from
acquiring majority control of Coty for two years.34
Coty struggled with integration issues and problems in its Consumer Beauty
division in 2018 and announced the resignation of its CFO in August 2018.35 In
November 2018, Coty announced that Laubies would become CEO, Harf would
become Chairman of the Board, and Schoewel was appointed the new Lead
Independent Director.36 In January 2019, Coty experienced further management
changes. On February 8, 2019, Coty announced it had beat estimates for sales and
earnings, that management had begun to stabilize the business, and that its
“immediate objective is to finalize a Strategic Plan” for future growth.37
C. JAB Proposes a Tender Offer
On February 12, 2019, Harf sent a publicly filed letter on behalf of JAB Parent
to the Board, informing Coty’s directors that a JAB affiliate would commence a
tender offer to acquire up to 150 million—but not less than 50 million—additional
Coty shares for $11.65 per share (the “JAB Proposal”).38 The JAB Proposal
33
Id. ¶¶ 46-47, 85.
34
Id. ¶ 85.
35
Id. ¶¶ 83-84, 87.
36
Id. ¶¶ 90-91.
37
Id. ¶¶ 95-96, 99, 101.
38
Id. ¶¶ 103-04; see also Weinberger Aff. Ex. A (“JAB Proposal”), at 1.
8
contemplated JAB increasing its Coty stockholdings from approximately 40% to a
minimum of 47% and a maximum of 60%.39 It stated that “[i]f shareholders tender
more than 150 million shares of Common Stock, [JAB] will purchase such shares
on a pro rata basis.”40 The JAB Proposal was conditioned on “the independent
directors of the Company” approving the Tender Offer and “recommend[ing] that
the Company’s shareholders accept” the Tender Offer.41
According to the JAB Proposal, the proposed Tender Offer represented “a
premium of approximately 38% to the 90-day volume-weighted average share price
as of [February 11, 2019], a premium of approximately 51% to the 30-day volume-
weighted average share price as of [February 11, 2019], and approximately a 21%
premium to [the] closing share price” on February 11, 2019.42 By contrast, the JAB
Proposal represented a considerable discount compared to Coty’s 52-week high of
$21.53 per share and to the estimated “intrinsic value” of the shares ($22.00)
according to a recent BMO Capital Markets analyst report.43
39
Compl. ¶¶ 48, 105.
40
JAB Proposal at 1.
41
Id. at 2.
42
Id. at 1.
43
Compl. ¶¶ 103, 110.
9
On February 13, 2019, the day after making the JAB Proposal, JAB launched
the Tender Offer.44
On February 14, 2019, the Board resolved by unanimous written consent to
form the Special Committee to evaluate and determine how to respond to the Tender
Offer.45 The Board resolved that Schoewel, Singer, and Chalmers did not have “any
interest in, or in connection with, any Potential Transaction, including the Tender
Offer, that is different from the interests of the Company’s stockholders generally.”46
D. The Special Committee Process
Shortly after its formation, the Special Committee retained Sidley Austin LLP
as its legal advisor and Centerview Partners LLC (“Centerview”) as its financial
advisor.47 On February 20, 2019, the Special Committee held a meeting that,
according to the minutes, included a discussion of “each member’s potential
conflicts of interest in connection with the transaction, including with respect to JAB
and its affiliates.”48 The Special Committee then “determined that each member of
the Committee does not have any material interest in, or in connection with, the Offer
44
Id. ¶ 108.
45
Id. ¶¶ 5, 111-12.
46
Id. ¶ 112.
47
Id. ¶¶ 119, 124.
48
Id. ¶ 115.
10
that is different from the interests of the Company’s stockholders generally.” 49
Absent from the minutes are any indication that the Special Committee made a
determination as to the independence and disinterestedness of its members from
JAB. Around this time, each member of the Board completed questionnaires in
connection with the Tender Offer, which sought information concerning their
independence.50
As the Special Committee evaluated the Tender Offer over the next month,
JAB consistently communicated that it would terminate the Tender Offer if the
Special Committee was not prepared to recommend it in a timely fashion.51
Centerview informed the Special Committee that the Tender Offer came at a “highly
complex time” on the heels of a “new [management] team for Coty” that had not
completed its strategic plan:
although the new senior management team had commenced a strategic
planning process, that process had not yet matured to the point at which
a strategic plan or accompanying financial projections had been
completed, and the results of that process were not expected to be
available until May 2019 at the earliest.52
49
Id.
50
Id. ¶ 117.
51
Id. ¶¶ 125-27.
52
Id. ¶ 130.
11
The Special Committee directed Centerview to work with Laubies and Coty’s CFO
to modify the previous management team’s projections consistent with the nascent
strategic plan.53
The Special Committee sought an increase of the Tender Offer price once,
without providing a counter offer price or minimum price.54 JAB would not engage
in monetary negotiations with the Special Committee, but agreed to two non-
monetary changes to the Tender Offer terms: (i) raising the minimum share tender
condition so that if the Tender Offer was consummated, JAB would own at least
50.1% of the outstanding shares; and (ii) entering into a Stockholders Agreement.55
On March 17, 2019, the Special Committee recommended that the Board
approve the Stockholders Agreement and recommend that stockholders tender their
shares to JAB.56 Later on March 17, the Board voted to accept the Special
Committee’s recommendation, with the JAB Directors recusing themselves from the
Board vote.57 Coty and the JAB Entities entered into the Stockholders Agreement
53
Id. ¶¶ 131-32.
54
Id. ¶ 137.
55
Id. ¶¶ 104, 138-43.
56
Id. ¶ 146.
57
Id.; Regan Aff. Ex. A (“Recommendation Statement”), at 18-19 (Dkt. 66).
12
that same day.58 The Stockholders Agreement includes the following provisions that
were intended to protect Coty’s minority stockholders:
A three-year prohibition on the JAB Entities transferring shares
to third parties if those parties would own in excess of 20% of
Coty’s voting power following the transfer.59
Covenants relating to the Board’s composition, including that the
JAB Entities and the Company cause the election to the Board of
at least four directors that are independent from JAB and two
new independent directors “by no later than September 30,
2019.”60
Restrictions requiring approval of related party transactions by
Coty’s “Independent Directors.”61
A three-year prohibition on the JAB Entities acquiring more than
9% of Coty stock without “Disinterested Director Approval.”62
E. The Recommendation Statement and Post-Tender Offer Events
On March 18, 2019, Coty filed its Schedule 14-D
Solicitation/Recommendation Statement (the “Recommendation Statement”). The
58
Regan Aff. Ex. B (“Stockholders Agreement”) Preamble.
59
Id. § 2.01(a).
60
Id. § 3.01.
61
Id. § 3.02. “Independent Director” is defined as “a director on the Board that qualifies
as ‘independent’ under the requirements of Rule 10A-3 under the Exchange Act and
Applicable Governance Rules.” Id. at 3.
62
Id. § 3.03(a). “Disinterested Director Approval” is defined as “the affirmative approval
of a special committee of the Board comprised solely of Independent Directors who are
disinterested and independent under Delaware Law as to the matter under consideration,
duly obtained in accordance with the applicable provisions of the Company’s
organizational documents, applicable law and Applicable Governances Rules.” Id. at 2.
13
Recommendation Statement stated that, “[o]ther than Messrs. Goudet, Harf and
Faber and Ms. Kamenetzky, the Company is not aware of any actual or potential
material conflicts of interest between any of the Company’s executives and directors,
including members of the Special Committee, and the Company.”63 It also made
several references to the “independent directors” of the Special Committee,64 but
omitted information regarding the professional history and relationships between
JAB and the Outside Directors, including the members of the Special Committee.65
The Recommendation Statement stated that the information on the
Company’s website, which included certain biographical information on the
directors, “should not be considered part of this statement or incorporated herein by
reference.”66 It also did not fully incorporate the Company’s last annual proxy
statement, which included certain director biographical information, but only
“incorporated specific portions of that proxy statement and excluded the portions
that contain[ed] the Special Committee members’ biographical information.”67
63
Compl. ¶ 150.
64
Id. ¶ 152.
65
Id. ¶ 153.
66
Id.
67
Id. ¶ 154.
14
On April 25, 2019, the Tender Offer expired. More than 336 million shares
were tendered, representing approximately 75% of Coty’s publicly-owned shares.68
On April 30, 2019, JAB accepted for purchase the maximum of 150 million shares,
which resulted in a proration factor of approximately 44.56% and a total purchase
price of approximately $1.75 billion.69
On May 8, 2019, Coty announced its fiscal year 2019 third quarter earnings,
which beat analyst expectations.70 The next day, during an earnings call, Coty
executives confirmed that the Company had resolved its supply chain issues and
Laubies previewed the new strategic plan, which would begin to rollout in late June
2019.71 By May 17, 2019, Coty’s stock price had increased approximately 25%,
from a close of $10.82 per share on April 30, 2019, the date the Tender Offer was
consummated, to a close of $13.50 per share.72
In September 2019, three new directors were added to the Board.73 One of
them, Joachim Creus, is a dual fiduciary who serves as a senior executive at various
JAB entities and admittedly is not independent of JAB.74 The other two directors,
68
Id. ¶ 8.
69
Id.
70
Id. ¶ 163.
71
Id. ¶¶ 165-67.
72
Id. ¶ 172.
73
Id. ¶ 176.
74
Id.
15
Pierre Denis and Beatrice Ballini, both have strong ties to JAB and relationships
with JAB managing partners.75
II. PROCEDURAL HISTORY
In May 2019, Plaintiffs each filed separate actions challenging the Tender
Offer, which the court consolidated.76 On October 21, 2019, Plaintiffs filed the
Verified Second Amended Class Action and Derivative Complaint (as defined
above, the “Complaint”).77
The Complaint asserts four claims: two class action claims concerning the
Tender Offer (Counts I and II) and two derivative claims relating to the Stockholders
Agreement (Counts III and IV).
Count I asserts that the Individual Defendants breached their fiduciary duties
because they (i) “knowingly failed to adequately consider whether any member of
the Special Committee was actually independent of JAB,” (ii) “intentionally
submitted false Questionnaires concerning the independence of the Company’s
directors and officers, including the Special Committee members,” and (iii) “failed
to disclose all material information concerning the Tender Offer and the conflicts of
interest of the Special Committee members in the [Recommendation Statement].”78
75
Id. ¶¶ 177-78.
76
Dkt. 4.
77
Compl.
78
Id. ¶¶ 204, 206.
16
Count II asserts that the JAB Entities breached their fiduciary duties in their capacity
as the Company’s de facto controlling stockholder because they “opportunistically
timed and priced the Tender Offer so that it undervalued Coty and structured it in a
coercive manner.”79
Count III asserts, derivatively on behalf of the Company, that the JAB Entities
breached Section 3.01 of the Stockholders Agreement by (i) failing “to cause the
election to the Board of at least four independent directors who are disinterested” as
relates to the JAB Entities and their affiliates and (ii) failing to elect two new
independent directors in September 2019.80 Count IV asserts a fiduciary duty claim
on behalf of the Company against the Individual Defendants for causing and failing
to remedy the Company’s continuing breaches of Section 3.01 of the Stockholders
Agreement.81
In November 2019, each of the Defendants moved to dismiss the Complaint
in whole or in part under Court of Chancery Rule 12(b)(6) for failure to state a claim
for relief.82 On May 8, 2020, after briefing and argument, Plaintiffs and the JAB
Entities stipulated to the dismissal of JAB Parent without prejudice and the
79
Id. ¶¶ 209, 211.
80
Id. ¶¶ 213-17.
81
Id. ¶¶ 218-23.
82
Dkt. 61; Dkt. 65; Dkt. 68.
17
withdrawal of the JAB Entities’ motion to dismiss Count II for lack of personal
jurisdiction.83
III. ANALYSIS
The standards governing a motion to dismiss under Rule 12(b)(6) for failure
to state a claim for relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and [(iv)] dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.84
Before turning to the issues raised in Defendants’ motions, it bears mention
what is not at issue. The JAB Entities concede for present purposes that the Tender
Offer is subject to entire fairness review and advance no argument that Count II fails
to state a claim for relief as to stockholders who tendered and received consideration
for their shares. Their primary opposition to Count II was based on a personal
jurisdiction defense they have since abandoned.
The Outside Directors, who filed an answer to the Complaint, do not dispute
that Count I states a claim for breach of fiduciary duty against them and moved to
dismiss Count I only in part. Specifically, the Outside Directors and all other
83
Dkt. 116.
84
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal quotations and
citations omitted).
18
Defendants assert that the class claims for breach of fiduciary duty must be dismissed
insofar as they are asserted on behalf of the so-called “Non-Tendering
Stockholders.” That term is a misnomer. As clarified during oral argument, the
Defendants seek to partially dismiss the class claims to the extent they are brought
on behalf of stockholders of the Company (i) who did not tender any of their shares
or (ii) who tendered some or all of their shares but continued to hold shares of the
Company after the Tender Offer due to proration.85 With respect to the latter
category, Defendants contend that tendering stockholders should not be able to seek
relief with respect to the shares such stockholders continued to hold after the Tender
Offer.86 This decision refers to stockholders falling within either category as the
“Remaining Stockholders.”
Defendants’ motions raise essentially four issues. First, does Count I state a
non-exculpated claim for breach of fiduciary duty against Laubies as a director?
Second, does Count I state a claim for breach of fiduciary duty against the JAB
Directors? Third, does the Complaint state derivative claims for breach of contract
and breach of fiduciary duty with respect to the Stockholders Agreement? Fourth,
does the Complaint sufficiently allege that the Remaining Stockholders were harmed
by the Tender Offer? The court addresses each issue in turn below.
85
Mot. to Dismiss Hr’g Tr. 13, 133-35 (Apr. 21, 2020) (Dkt. 117).
86
Id.
19
A. Laubies’ Cornerstone Defense
Coty’s certificate of incorporation contains a provision exculpating its
directors from breaches of the duty of care, as permitted under Section 102(b)(7) of
the Delaware General Corporation Law.87 As our Supreme Court explained in In re
Cornerstone Therapeutics Inc, Stockholder Litigation, “[w]hen a director is
protected by an exculpatory charter provision, a plaintiff can survive a motion to
dismiss by that director defendant by pleading facts supporting a rational inference
that the director harbored self-interest adverse to the stockholders’ interests, acted to
advance the self-interest of an interested party from whom they could not be
presumed to act independently, or acted in bad faith.”88
Laubies contends that Plaintiffs have failed to allege a non-exculpated claim
against him as a director of Coty. Focusing on the second Cornerstone inquiry,
Laubies implicitly concedes his lack of independence from JAB by not arguing
otherwise,89 but contends that Plaintiffs have failed to allege that he acted to advance
the self-interest of JAB in connection with the Tender Offer. The court disagrees.
87
See Regan Aff. Ex. F Art. VIII; see also McMillan v. Intercargo Corp., 768 A.2d 492,
501 n.40 (Del. Ch. 2000) (noting the court may take judicial notice of the Company’s
certificate of incorporation).
88
115 A.3d 1773, 1179-80 (Del. 2015).
89
This concession is not surprising. See In re Ezcorp Inc. Consulting Agreement Deriv.
Litig., 2016 WL 301245, at *35 (Del. Ch. Jan. 2016) (“Under the great weight of Delaware
precedent, senior corporate officers generally lack independence for purposes of evaluating
matters that implicate the interests of a controller.”).
20
There are sufficient facts in the Complaint to support a rational inference that
Laubies acted to advance the self-interest of JAB with respect to the Tender Offer.
In addition to voting to “approve the Stockholders Agreement and recommend that
stockholders tender their shares to JAB,” Laubies, as Coty’s CEO, allegedly “made
sure the projections” the Special Committee and its financial advisor (Centerview)
used in connection with the Tender Offer “were understated” and “kept the market
in the dark” about Coty’s strategic plan, which “helped create uncertainty to benefit
JAB’s plan to acquire majority ownership at the expense of Coty’s public
stockholders.”90
As this court recently held in Voigt v. Metcalf, a director who also serves as
an officer is not entitled to the protection of Section 102(b)(7) if the complaint
contains allegations to support a rational inference that “he may have acted out of
loyalty to [the controller]” and “could have breached his duties in his capacity as an
officer.”91 The Complaint does so here as to Laubies.92 Thus, Laubies is not entitled
90
Compl. ¶¶ 102, 133-34, 146.
91
2020 WL 614999, at *27 (Del. Ch. Feb. 10, 2020) (holding that a director who also
served as CEO was not entitled to the protection of Section 102(b)(7) because he allegedly
“provid[ed] his assessment of the Challenged Transaction to the Board and advocate[ed]
in favor of the deal” in his capacity as an officer).
92
Although Count I is asserted against the Individual Defendants “as directors and/or
officers of Coty” and Laubies is the only Individual Defendant who served as an officer of
Coty (see Compl. ¶¶ 15-23, 201), Laubies did not argue for dismissal of Count I in his
capacity as an officer until his reply brief, thus waiving the argument. See Zutrau v.
Jansing, 2013 WL 1092817, at *6 (Del. Ch. Mar. 18, 2013) (“Under the briefing rules, a
party is obliged in its motion and opening brief to set forth all of the grounds, authorities
21
to the protection of Section 102(b)(7) at the pleadings stage and the motion to
dismiss Count I against him will be denied.
B. The JAB Directors’ Abstention Defense
Over twenty-five years ago, then Vice Chancellor Jacobs explained in In re
Tri-Star Pictures, Inc. that “Delaware law clearly prescribes that a director who
plays no role in the process of deciding whether to approve a challenged transaction
cannot be held liable on a claim that the board’s decision to approve that transaction
was wrongful.”93 As this court more recently stated the principle, a “director can
avoid liability for an interested transaction by totally abstaining from any
participation in the transaction.”94
Relying on Tri-Star, the JAB Directors assert that Count I should be dismissed
as to them because “none of the JAB Directors played a role in determining whether
the Board would recommend that Coty stockholders tender their shares in the Tender
Offer – none served on the Special Committee, and they all recused themselves from
and arguments supporting its motion”). Laubies’ opening brief instead was limited to an
exculpation defense, which does not apply to corporate officers. See Gantler v. Stephens,
965 A.2d 695, 709 n.37 (Del. 2009) (“Although legislatively possible, there currently is no
statutory provision authorizing comparable exculpation of corporate officers.”). In any
event, the acts described above that Laubies allegedly took as Coty’s CEO to aid JAB
independently support a reasonably conceivable claim against him for breach of his duty
of loyalty as an officer.
93
1995 WL 106520, at *2 (Del. Ch. Mar. 9, 1995) (emphasis added).
94
In re Pilgrim’s Pride Corp. Deriv. Litig., 2019 WL 1224556, at *15 (Del. Ch. Mar. 15,
2019) (emphasis added).
22
the Board’s March 17, 2019 decision to recommend the Tender Offer.”95 The
challenge to making this argument now, at the pleadings stage, is that the abstention
principle explained in Tri-Star is not absolute and often implicates factual questions
that cannot be resolved on the pleadings.
Tri-Star itself involved a motion for summary judgment that was decided
based on undisputed facts.96 And there, the court posed a hypothetical to illustrate
that simply abstaining from a vote would not exonerate a fiduciary:
One might, for example, imagine a scenario in which certain members
of the board of directors conspire with others to formulate a transaction
that is later claimed to be wrongful. As part of the conspiracy, those
directors then deliberately absent themselves from the directors’
meeting at which the proposal is to be voted upon, specifically to shield
themselves from any exposure to liability. In such circumstances it is
highly unlikely that those directors’ “nonvote” would be accorded
exculpatory significance. 97
Recently, based on a careful review of this court’s precedents, Vice
Chancellor Laster described in Voigt other scenarios that would preclude applying
the abstention principle and why the “factual nuances underlying this rule” often
necessitate the development of a discovery record before the rule can be applied:
95
JAB Opening Br. 26-27 (Dkt. 68).
96
1995 WL 106520, at *2-3.
97
Id.
23
Similarly, an absent director who knowingly accepts a personal benefit
flowing from a self-interested transaction and refuses to return it upon
demand, can be thought to have ratified the action taken by the board
in his absence and, thus, share in the full liability of his fellow directors.
Or a court might hold a director liable, even if the director abstained
from the formal vote to approve the transaction, if the director was
closely involved with the challenged transaction from the very
beginning and the transaction was rendered unfair based, in large part,
on the director’s involvement. More generally, this court may hold an
absent director liable if the director played a role in the negotiation,
structuring, or approval of the proposal. Given the factual nuances
underlying this rule, it is no surprise that the leading cases have not
addressed the issue at the pleadings stage, but rather in post-trial rulings
or on a motion for summary judgment.98
The factual context of Voigt also is instructive. There, the directors in
question were dual fiduciaries for the acquirer and its alleged controller (CD&R),
which stood on both sides of the challenged transaction.99 The court held that the
directors affiliated with CD&R were not entitled to dismissal at the pleading stage
simply because they recused themselves from the board’s discussion of the
challenged transaction and abstained from voting on the deal.100 The court reasoned
it was “not clear at this stage precisely when the CD&R directors were participating
solely as representatives of CD&R” and “making [that] capacity determination”
98
2020 WL 614999, at *27 (internal quotation marks, citations, and alterations omitted).
99
Id. at *28.
100
Id.
24
impermissibly “would require drawing inferences in favor of the defendants, rather
than the plaintiff.”101
Here, the Complaint alleges that each of the JAB Directors, who served as
dual fiduciaries for Coty and JAB, failed to disclose in their Coty director
questionnaires all of their relationships with the Special Committee members, which
allegedly caused Coty to distribute a Recommendation Statement that misleadingly
portrayed the Special Committee members to be independent.102 Notably, that
Recommendation Statement suggests that the JAB Directors—unlike the directors
in Tri-Star and Voigt who invoked the abstention principle103—participated in the
key board meeting before the vote on the challenged action: “The representatives of
the JAB Group who are members of the Board discussed with the Board their reasons
for making the Offer, including their belief that the Offer represents a strong public
expression of support for the Company and its management team” before “Messrs.
Harf, Faber and Goudet and Ms. Kamenetzky excused themselves from the
meeting.”104
Based on these facts, it is reasonably conceivable that the JAB Directors did
not totally abstain from the process by which the Tender Offer was approved.
101
Id.
102
Compl. ¶¶ 16-19, 117-18.
103
Tri-Star, 1995 WL 106520, at *2-3; Voigt, 2020 WL 614999, at *27.
104
Recommendation Statement at 18.
25
Ascertaining whether the JAB Directors “complied with their fiduciary duties” thus
“requires fact-specific analyses that cannot be conducted on a motion to dismiss.”105
Accordingly, the JAB Directors’ motion to dismiss Count I of the Complaint must
be denied.
C. The Stockholders Agreement Claims
Count III of the Complaint asserts that the JAB Entities breached Section 3.01
of the Stockholders Agreement because Coty has no independent directors. Count
IV asserts the Individual Defendants breached their fiduciary duties by causing and
failing to remedy the Company’s breaches of the Stockholders Agreement.
Defendants contend that both claims fail to state a claim for relief. The court
analyzes each of these challenges in turn.
1. The Breach of Contract Claim (Count III)
To establish a claim for breach of contract under Delaware law, a plaintiff
must prove: (i) the existence of a valid and enforceable contract; (ii) that the
defendants breached the contract; and (iii) that the plaintiff was damaged as a result
of those breaches.106 Defendants’ motions focus on the second element.
Section 3.01 of the Stockholders Agreement requires that the Company and
the JAB Entities ensure that (i) at least four “Independent Directors” are elected to
105
Voigt, 2020 WL 614999, at *27-28.
106
Ivize of Milwaukee, LLC v. Compex Litig. Supp., LLC, 2009 WL 1111179, at *8 (Del.
Ch. Apr. 27, 2009) (citations omitted).
26
the Board and (ii) two new “Independent Directors” are elected to the Board before
the end of September 2019:
(a) For so long as this Agreement is in effect, the Company and each
Stockholder [i.e., the JAB Entities] shall take all necessary actions
within their control . . . so as to cause to be elected to the Board, and to
cause to continue in office, at any given time, no fewer than four (4)
Independent Directors who are disinterested as it relates to the
Stockholders and their respective Affiliates . . . .
(b) The Company and each Stockholder shall take all necessary actions
within their control . . . so as to cause, no later than September 30, 2019,
to be elected to the Board two (2) new Independent Directors who are
disinterested as it relates to the Stockholders and their respective
Affiliates . . . .107
The independence test embedded in Section 3.01 has two elements. 108 The first
comes from the definition of “Independent Director,” which requires the directors to
qualify as “independent” under “the Exchange Act and Applicable Governance
Rules.”109 The second comes from the text of Section 3.01, quoted above, which
requires the directors to be disinterested with respect to JAB.110 This opinion refers
107
Stockholders Agreement § 3.01 (emphasis added). Under the Stockholders Agreement,
certain powers are delegated to these “Independent Directors.” See, e.g., id. § 3.02
(independent director approval of related party transactions); § 3.03(b) (independent
director approval of going private transaction); § 4.09 (independent directors can agree to
amend to remove protections).
108
Recommendation Statement at 21 (defining directors who meet both prongs as
“Independent Directors” under the Stockholders Agreement).
109
Stockholders Agreement at 2 (definition of “Independent Director”).
110
Id. § 3.01.
27
to directors that meet both of these requirements as “Section 3.01 Independent
Directors.”
Defendants do not argue as a factual matter that any of the Coty directors
satisfy the independence test embedded in Section 3.01. This is unsurprising given
that the Complaint contains detailed factual allegations of a web of relationships
between JAB and each member of the Board, calling into question each of the
Individual Defendants’ independence from JAB.111
Defendants instead assert that Plaintiffs fail to plead a viable breach of Section
3.01(a) of the Stockholders Agreement on the theory that the Stockholders
Agreement stipulates that the Outside Directors are Section 3.01 Independent
Directors,112 as follows:
For the avoidance of doubt, as of the date hereof [i.e., March 17, 2019],
each of Sabine Chalmers, Erhard Schoewel, Robert Singer and Paul S.
Michaels are Independent Directors who are disinterested as it relates
to the Stockholders and their respective Affiliates.113
This opinion refers to this provision as the “Independent Director Representation.”
111
Compl. ¶¶ 15-23, 49-79, 117, 176-78; see supra Part I.A.
112
None of the Defendants substantively addressed in their briefs Plaintiffs’ contention that
the JAB Entities breached Section 3.01(b), thus waiving that issue. See Emerald P’rs v.
Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
113
JAB Opening Br. 57 (quoting Stockholders Agreement § 3.01(a)); Stockholders
Agreement, Preamble.
28
According to Defendants, the Independent Director Representation “makes
the intent of the parties to the Stockholders Agreement clear: the parties intended to
consider Chalmers, Schoewel, Singer and Michaels as disinterested directors,
notwithstanding any potential argument otherwise (including by a stockholder
plaintiff).”114 Based on this representation, Defendants assert there can be no breach
of the Stockholders Agreement for failure to cause the election of four Section 3.01
Independent Directors to the Board because the Outside Directors were deemed to
satisfy the independence test embedded in Section 3.01.
Plaintiffs respond that the Complaint states a claim for breach of Section 3.01
because the Independent Director Representation “does not speak to director
independence after the date of the Stockholders Agreement and after the closing of
the Tender Offer, at which point any objective analysis would conclude that the four
directors clearly lacked independence from JAB and its affiliates.”115 According to
Plaintiffs, the Independent Director Representation only speaks “as of” the date of
the Stockholders Agreement, i.e., March 17, 2019, because it was intended only to
“protect the formation” of the Stockholders Agreement.116 In other words, this
temporal qualification was intended to preclude a challenge to the authority of the
114
JAB Opening Br. 58.
115
Pls.’ Answering Br. 36 (Dkt. 82).
116
Mot. to Dismiss Hr’g Tr. 100.
29
Outside Directors to approve the Stockholders Agreement on behalf of the Company
for lack of independence from JAB—nothing more and nothing less.
Defendants counter that the “obvious purpose” of the Independent Director
Representation was to apply “as of March 17 and on a going-forward basis, unless
any material facts changed”117 and that the “correct interpretation” of the provision
is that the Outside Directors “will be considered Independent Directors under
Section 3.01(a) until the facts that existed as of March 17, 2019 change in a way that
bears on the definition of Independent Director in the contract.”118 Significantly,
however, the forward-looking language Defendants’ briefs urge the court to read
into Section 3.01(a) does not appear in the contract.
On a motion to dismiss a contract claim for failure to state a claim for relief,
the court “cannot choose between two differing reasonable interpretations of
ambiguous documents.”119 “Dismissal is proper only if the defendants’
interpretation is the only reasonable construction as a matter of law.”120
Here, Plaintiffs offer a reasonable interpretation of the Independent Director
Representation that accords with its plain language, i.e., that the representation
117
Outside Dirs. Opening Br. 22 (Dkt. 65).
118
Outside Dirs. Reply Br. 9 (Dkt. 90).
119
Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d
609, 613 (Del. 1996).
120
Id.
30
applies only as of March 17, 2019—the date on which the Stockholders Agreement
was entered into and on which the Outside Directors voted to approve the Tender
Offer—and does not apply on a going-forward basis. Given this competing
interpretation and the existence of factual disputes concerning whether any, much
less four, members of the Board satisfy the independence standard embedded in
Section 3.01, Count III states a claim for breach of the Stockholders Agreement.121
The JAB Entities assert as a second line of attack what ordinarily would be a
threshold issue, i.e., that Plaintiffs lack standing to bring Count III. Specifically,
they contend that Plaintiffs cannot sue to enforce the contractual obligations of the
Company because “Section 4.13(b) of the Stockholders Agreement provides that the
‘Independent Directors’—not Coty stockholders—‘have the authority to authorize
and direct the Company to enforce its rights under this Agreement.’” 122 Plaintiffs
counter that they may bring a claim for breach of the Stockholders Agreement on
behalf of the Company because the language in Section 4.13(b) is “non-
exclusive.”123 The court agrees.
121
Because the court concludes that the Independent Director Representation is susceptible
to more than one reasonable interpretation and does not bar Plaintiffs’ breach of contract
claim, the court does not reach Plaintiffs’ arguments that Defendants obtained contractual
rights through fraud and breach of fiduciary duty. Pls.’ Answering Br. 38-41.
122
JAB Opening Br. 58 (quoting Stockholders Agreement § 4.13(b)).
123
Pls.’ Answering Br. 34. Plaintiffs also argue that if Section 4.13(b) seeks to “vest
contract enforcement exclusively with directors, and to divest stockholders of the power to
31
The plain language of Section 4.13(b) does not vest exclusive enforcement
authority with the Section 3.01 Independent Directors. It simply provides that they
are authorized to act on behalf of the Company if the Company seeks remedies under
the Stockholders Agreement against JAB. Because the other five members of the
Board are admittedly beholden to JAB,124 it is logical that the Stockholders
Agreement would clarify that the four Section 3.01 Independent Directors would
have the authority to enforce the Company’s rights under the agreement, but that
does not mean that they have the exclusive authority to do so. Had that been the
intent of Section 4.13(b), it would have been simple to say so expressly. Indeed,
when the parties to the Stockholders Agreement intended to vest exclusive authority
to a subgroup of directors, they knew how to do so by providing that such a group
“solely” or “only” would have the authority to take specified actions enumerated
elsewhere in the Stockholders Agreement.125
For the reasons explained above, the court denies Defendants’ motion to
dismiss Count III and turns next to analyze the breach of fiduciary duty claims
sue derivatively, [it] would be void as against public policy.” Id. The court does not need
to reach this issue.
124
Compl. ¶¶ 16-19, 50; see supra Part III.A.
125
See e.g., Stockholders Agreement at 2 (“‘Disinterested Director Approval’ shall mean
the . . . approval of a special committee . . . comprised solely of Independent Directors”);
id. § 3.03(a) (“a tender or exchange offer may only be effected with Disinterested Director
Approval”).
32
against the Individual Defendants in Count IV that arise from the alleged breaches
of the Stockholders Agreement.
2. The Breach of Fiduciary Duty Claim (Count IV)
Count IV asserts that the Individual Defendants breached their fiduciary
duties by causing and failing to remedy the Company’s breaches of Section 3.01 of
the Stockholders Agreement. As a remedy, the Complaint seeks to enforce the
Stockholders Agreement to require the JAB Entities and the Company “to cause to
be elected to the Board four independent directors who are disinterested as relates to
the [JAB Entities] and their respective affiliates.”126 All of the Individual
Defendants seek dismissal of this claim, but on two different grounds. Both grounds
for dismissal fail.
The Outside Directors assert Count IV should be dismissed as to them on the
theory they relied in good faith on the belief that the Independent Director
Representation in Section 3.01 applies on a going forward basis. The flaw in this
argument is that it is untethered from the allegations of the Complaint, which call
into question the Outside Directors’ good faith with respect to the composition of
the Board.
The Complaint specifically alleges that the Outside Directors
intentionally: (i) submitted false questionnaires omitting their ties to JAB,
126
Compl. at 103 (Prayer for Relief ¶ E).
33
(ii) entered into a mutually self-interested bargain with JAB regarding the
Independent Director Representation, (iii) misled Coty’s minority stockholders
about their lack of independence in the Recommendation Statement, (iv) appointed
two new non-independent directors to the Board in violation of Section 3.01(b), and
(v) then re-nominated and recommended to stockholders a slate of directors that
included no Section 3.01 Independent Directors.127 Based on these allegations,
which support an unchallenged claim for breach of fiduciary duty against the Outside
Directors in Count I,128 it is reasonably conceivable that those directors knowingly
caused the Company to breach Section 3.01(a) in a self-interested manner in order
to retain their directorships and remain in JAB’s good graces.129
Turning to the JAB Directors and Laubies, they argue it is not reasonably
conceivable that they breached their fiduciary duties in connection with any alleged
violation of the Stockholders Agreement because only the Section 3.01 Independent
Directors have the authority to enforce that agreement.130 As discussed above,
however, the authority delegated to the Section 3.01 Independent Directors to
127
Id. ¶¶ 117, 154-56, 176-78, 187, 204.
128
As discussed above, the Outside Directors did not seek dismissal of the breach of
fiduciary duty claim asserted against them in Count I with respect to stockholders who
tendered and sold their shares.
129
Compl. ¶¶ 187-88.
130
JAB Opening Br. 59.
34
enforce the contract is non-exclusive.131 Thus, it is reasonably conceivable that the
JAB Directors and Laubies could have a role as fiduciaries of the Company to
remedy a breach of the provisions of the Stockholders Agreement governing the
composition of the Board. Indeed, the Stockholders Agreement provides that
Section 3.01 Independent Directors are to be nominated by the Remuneration and
Nomination Committee of the Board, which includes a JAB Director (Harf), and
approved by the full Board, which includes all of the Individual Defendants.132 The
Complaint also alleges that the JAB Directors and Laubies played a role in electing
non-independent directors in violation of Section 3.01.133
In sum, Plaintiffs have pled facts sufficient to support a reasonably
conceivable claim that the Individual Defendants breached their fiduciary duties by
causing and failing to remedy the Company’s alleged breaches of Section 3.01 of
the Stockholders Agreement.
131
See supra Part III.C.1.
132
Stockholders Agreement §§ 3.01(a) & (b); see Regan Aff. Ex. C (Coty’s Schedule 14A
filed on September 25, 2019), at 10. The court may take judicial notice of Harf’s
membership on the Remuneration and Nomination Committee of the Board because it is
not subject to reasonable dispute between the parties. In re General Motors (Hughes)
S’holder Litig., 897 A.2d 162, 170 (Del. 2006) (“[I]n acting on a Rule 12(b)(6) motion to
dismiss, trial courts may consider hearsay in SEC filings to ascertain facts appropriate for
judicial notice under Delaware Rule of Evidence 201. . . [however] it [can] only take
judicial notice of facts not subject to reasonable dispute.”) (internal quotation marks,
alterations, and citations omitted).
133
See Compl. ¶¶ 176-78.
35
D. Harm to the Remaining Stockholders
Defendants argue that the class claims must be dismissed as to the Remaining
Stockholders because they purportedly did not suffer harm. Specifically, Defendants
contend that, accepting as true Plaintiffs’ allegation that JAB controlled Coty before
the Tender Offer as the holder of approximately 40% of its shares, the stockholders
who continued to own stock in Coty after the Tender Offer were not harmed because
they were not differently situated than they were before the Tender Offer. According
to Defendants, “Plaintiffs try to split hairs about the meaning of control” and the
“distinction Plaintiffs try to draw between the power provided by mathematical
control and de facto control is not recognized by Delaware law.”134 The court
disagrees.
The premise of Defendants’ argument comes from legal doctrine Delaware
courts use to review corporate behavior. In particular, it is well-settled under
Delaware law that a stockholder owes fiduciary duties when “the stockholder
(1) owns more than 50% of the voting power of a corporation or (2) owns less than
50% of the voting power of the corporation but ‘exercises control over the business
affairs of the corporation.’”135 This legal framework, however, does not mean that
134
JAB Opening Br. 18.
135
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014) (citing
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113-14 (Del. 1994) (quoting Ivanhoe
P’rs v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)), aff’d sub nom. Corwin
v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
36
a de facto controller may not obtain real benefits from securing mathematical control
of a corporation in a transaction and, as a corollary, that other stockholders of the
corporation potentially may suffer harm as a result of such a transaction.
As our Supreme Court recognized in Paramount Communications Inc. v. QVC
Network Inc., “[w]hen a majority of a corporation’s voting shares are acquired by a
single person or entity, or by a cohesive group acting together, there is a significant
diminution in the voting power of those who thereby become minority
stockholders.”136 The high court went on to explain that the price to be paid for such
a loss of voting power “is usually a control premium which recognizes not only the
value of a control block of shares, but also compensates the minority stockholders
for their resulting loss of voting power.”137 Once majority voting control is secured,
the high court further explained, the controller unilaterally may “(a) elect directors;
(b) cause a break-up of the corporation; (c) merge it with another company; (d) cash-
out the public stockholders; (e) amend the certificate of incorporation; (f) sell all or
substantially all of the corporate assets; or (g) otherwise alter materially the nature
of the corporation and the public stockholders’ interests.”138
136
637 A.2d 34, 42 (Del. 1994).
137
Id. at 43.
138
Id.
37
Plaintiffs assert that the Remaining Stockholders were harmed because
they: (i) “no longer have any expectation of receiving a control premium for their
shares in a future buyout”; (ii) face the risk of an unfair squeeze-out that JAB could
effect by written consent; (iii) lost the ability to meaningfully exercise their voting
franchise; (iv) lack any “say on basic issues pertaining to the Company,” and are
thus “subject to the whim and caprice of JAB”; and (v) are negatively impacted by
JAB’s new supermajority control which “has suppressed and will continue to
suppress the value” of the stock price.”139 Although Plaintiffs’ do not dispute that
JAB’s voting power was sufficiently potent before the Tender Offer that it would
have to lose a corporate election with a ninety percent turnout by a vote of more than
nine to one,140 the court cannot rule out at this stage of the case that the Remaining
Stockholders suffered harm when JAB secured mathematical control of Coty
through the Tender Offer.
Indeed, the Recommendation Statement noted the loss of the ability to obtain
a control premium in the future as a “negative factor” and recognized the potential
value to JAB of “obtaining a majority ownership stake”:
139
Compl. ¶¶ 174-75, 179-80, 182.
140
JAB Opening Br. 20 n.8; JAB Reply Br. 7 (Dkt. 93).
38
The Special Committee considered the fact, that prior to consummation
of the Offer, the JAB Group has the ability to exercise significant
influence over decisions requiring stockholder approval, but does not
currently have a majority ownership stake, however, Offeror’s
obtaining a majority ownership stake following the Offer would clearly
prevent other third parties from acquiring the Company without the
JAB Group’s consent, which may decrease the likelihood of a
subsequent sale of the Company, or that minority stockholders receive
a control premium for their Shares upon any such subsequent sale of
the Company, notwithstanding the provisions of the Stockholders
Agreement intended to protect the minority stockholders’ ability to
receive a premium for the purchase of their Shares in the event of future
strategic transactions involving the Company.141
In sum, it is reasonably conceivable that the Remaining Stockholders were
harmed as a result of the Tender Offer. Accordingly, the court will not dismiss any
of the claims at this time so as to preclude the Remaining Stockholders from seeking
to obtain relief.
IV. CONCLUSION
For the reasons explained above, all of Defendants’ motions to dismiss the
Complaint are DENIED.
IT IS SO ORDERED.
141
Recommendation Statement at 23-34 (emphasis added). The excerpt quoted above
acknowledges that the Stockholders Agreement may not ensure that minority stockholders
receive a premium for their shares in a future strategic transaction. To that end, the
Complaint asserts that the Stockholders Agreement could be amended by Coty’s allegedly
conflicted Board to remove the protections therein. Compl. ¶ 141 n.8. The Complaint’s
allegations concerning the alleged failure to comply with the independence requirements
embedded in Section 3.01 give credence to this contention. See supra Part III.C.
39
In re Coty Inc. Stockholder Litigation
Combined Opinion